AnalysisKen Fisher: How the Tel Aviv Stock Exchange peaked in the midst of war
Analysis
Ken Fisher: How the Tel Aviv Stock Exchange peaked in the midst of war
It almost seems counterintuitive that the Tel Aviv 35 Index has risen since October 7th, but it did. This can be attributed to two main factors: the Israeli economy's faster-than-expected recovery and the fact that the war has not expanded (yet), combined with positive global sentiment, to which Israeli stocks are closely correlated.
How is it possible that the local flagship index, TA-35, has risen since the war broke out on October 7th and even surpassed the peak it reached before the conflict? That sounds illogical, doesn’t it? However, the rise in major Israeli stocks actually makes sense when you consider one of the main drivers of markets in general—sentiment, which, despite the upheavals of recent weeks, continues to signal a bullish trend globally.
When discussing the state of stocks, one of the most important factors is the gap between expectations and reality. Last October, expectations regarding the Israeli market plummeted. Economic commentators expressed concerns that the Israeli economy would take a long time to recover. Many predicted a conflict that would spread across the entire Middle East, and perhaps even beyond. This has not happened yet, although concerns are increasing these days.
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Tel Aviv Stock Exchange (right), bombing in Gaza (left)
(Photo: Ibrahim Hams/ AFP Bloomberg)
In reality, what has happened until recently? Restaurants in Tel Aviv are full, Israel's GDP jumped 15% in the first quarter at an annual rate, and for the most part, the fighting has remained geographically contained. Stocks are indifferent; they focus on the fact that reality has exceeded expectations, which is why they are rising.
The increase in the TA-35 Index is not solely due to the exposure of large dual-listed companies to foreign markets. Nearly half of the cumulative revenues of the companies in the index come from Israel. As of the end of July, shares of 20 out of the 35 companies in the index have risen since October 7th, including the two largest banks, Hapoalim and Leumi, which derive about 95% of their revenues from within Israel.
Additionally, Israeli shares are more aligned with global markets than is commonly believed. Over the past 20 years, the Tel Aviv 35 Index has shown a correlation of 0.42 with the S&P 500 Index, and in the last five years, the correlation has been even higher, at 0.49.
Therefore, it’s essential to consider sentiment on a global scale. The year 2020 brought great despair due to lockdowns following the COVID-19 pandemic. In 2021, sentiment quickly rebounded, which set the stage for a negative surprise. Then came the Russian invasion of Ukraine, inflation surged, and interest rates rose, leading to falling stocks in 2022. It turned out that the fear was exaggerated, and thus a positive surprise gave birth to a new bull market. As legendary investor John Templeton said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Today, optimism is slowly building. Bearish investors are wrong to believe that we are in the euphoric phase. They argue that enthusiastic investors are ignoring concerns or the narrow breadth of the market, but that is not the case. Thirty percent of the stocks globally have produced a higher return than the MSCI World Index.
So how to assess sentiment? First, the hard way: Plotting professional forecasts via “sentiment bell curves,” revealing which outcomes are widely expected—hence pre-priced by stocks. Consider America’s widely watched S&P 500: In 2018, median forecasts saw 5.3% USD gains without dividends. Stocks fell -6.2%! 2019’s median 15.8% forecast paled versus reality’s 28.9%. 2023’s 9.4% average projection? Far from the actual 24.2%. Entering 2024, the median forecast was 1.8%—far below US stocks’ long-term 10.2% annualized return. Hardly “optimistic.” Of 54 forecasters, 40 bunched between -2.9% and 9.0%. Nine predicted -3.0% or worse. None saw gains over 17.1%. Now? Median 2024 forecasts jumped to 9.0%. But 15.3% gains through June mean that implies a 4.8% second-half decline. Euphoria? Ha! Forecasters still struggle catching up to stocks!
An easier tool: Compare economic data to prior estimates for GDP, inflation and more. Are most subsequent results missing estimates? Sentiment is then too rosy! Beating estimates? It’s too dour! Most key global data are topping estimates this year.
Consider the initial public offering (IPO) market, for example. IPOs flourish during periods of euphoria. In 2021, a record 1,035 IPOs were recorded in the U.S. Last year, the number of IPOs dropped by 85%. Since the beginning of this year, there has been a 16% increase. Therefore, forget the bear market talk. Sentiment indicates that the global market will continue to be bullish.
Ken Fisher is the founder and chairman of Fisher Investments, one of the largest independent money management companies in the world, managing over $236 billion for individuals, families, and institutions. The company currently has more than 145,000 clients, including some of the largest investors in the world.
